The difference between diminution of value and cost to cure

NAFA member, Anthony Kioussis, President of Asset Insight, shares the difference between diminution of value and cost to cure.

When an aircraft sustains any form of damage, its effect on the asset’s value must be considered. True “value diminution” occurs when an incident happens that requires maintenance or repair, such as a tug running into an aircraft or a hangar door denting the asset. Once repaired, a stigma associated with the event may lead to value diminution that follows the aircraft going forward.

Cost to cure

An area less understood by many, and often confused with value diminution, is “cost to cure.” Cost to cure results from an expense incurred after an incident that leads to maintenance or repair. The difference is that once the maintenance or repair takes place, the aircraft is as good as it once was – perhaps even better. It is important to remember that cost to cure does not necessarily equate to value and may not lead to a dollar-for-dollar value adjustment. Removing and replacing a wingtip mitigates the damage sustained and is a direct cost, but there is no increase to value, unless one can upgrade to a higher efficiency style wingtip. Should that be the case, the more efficient wingtip’s ability to improve fuel burn and speed may even mitigate “functional obsolescence” (the loss of value due to characteristics inherent within or to the aircraft) and increase value.

“The challenge is determining if true value diminution has occurred and accounting for it correctly when valuing the aircraft,” explains Barb Spoor, a senior ASA (American Society of Appraisers) accredited appraiser with Asset Insight, and former chair of the ASA’s Appraisal Review & Management Discipline Committee.

According to Spoor, numerous items must be considered. “We try to determine whether the damage was static or dynamic. In other words, was the aircraft standing still or was it in motion. Damage to the wing may be far less invasive from a tug creasing a wingtip than from the aircraft creasing that same wingtip while taxiing under its own power,” she adds.

Has structural damage occurred?

Another item to consider is whether structural damage has occurred. “The crease to the wingtip may be the tip of the iceberg,” according to Spoor, pointing out that there may be damage to the wing spar that required repair, an event that will likely impact the aircraft’s value, and perhaps its marketability, for the remainder of its life.

Was the pressure vessel damaged? A bird strike on the nose cone that results in the critter terminating in the cockpit (an actual incident) is likely to have a far greater, and lasting impact – no pun intended – on the aircraft’s value than a bird ingested by an engine. “The cost to cure for the engine repair may be high, although that is often covered by insurance,” says Spoor. “But there is unlikely to be any value diminution, or even a marketing stigma, to the aircraft associated with an engine event, especially if the engine is overhauled.”

Who performed the repair? Was it the aircraft’s manufacturer, an expert at an OEM-approved facility, or a local shop that is no longer in business? Did the OEM issue engineering drawings for a maintenance facility to conduct the repairs leading to an FAA Form 337 filing, or were the repairs conducted by the OEM, thereby negating a Form 337 filing? According to Spoor, “The more favorable perception of an OEM repair may assist in mitigating at least some of the value diminution.”

Exactly how were the repairs completed? Was the damaged part removed and replaced, or was the part repaired and reinstalled? An aircraft sporting an aileron that was punctured and replaced is likely to be valued differently than one whose aileron was repaired and reinstalled, as the latter asset will continue carrying a part that was damaged.

How long ago did the damage occur and when was the repair completed? “A 15-year-old aircraft that had a damaged wingtip replaced by the manufacturer during its 5th year of service is going to carry a nominal value diminution compared to an asset that received the same amount of damage during its 15th year of service while it was listed for sale,” states Spoor.